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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-24 · 150 added, 146 removed, 400 unchanged (43% of the section changed)

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A detailed discussion comparing our results of operations for the years ended December 31, 2021 and 2020 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

We are a leading precision oncology company focused on helping conquer cancer globally through use of our proprietary tests, vast data sets and advanced analytics.

Today our proprietary tests are helping to realize the full potential of precision oncology by providing patients and their doctors critical insights that can inform decisions at all stages of the disease, from screening, to monitoring cancer recurrence, to treatment decisions.

We believe that the key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which we intend to enable by our tests.

By looking at the unique dimensions of cancer found in blood, including genomic alterations, methylation, and fragmentomics, we are unlocking insights that can increasingly help patients across all stages of cancer, including at its earliest, when it’s most treatable.

To help identify cancer at the earliest stages, we are developing Guardant SHIELD, a blood test for cancer screening in average-risk adults without symptoms, that detects very early signs of cancer by interrogating genomic alterations, methylation, and fragmentomic signals from a simple blood draw.

In pursuit of our goal to manage cancer across all stages of the disease, we provide our Guardant360, Guardant360 LDT, Guardant360 CDx and GuardantOMNI liquid biopsy-based tests for advanced stage cancer.

Our Guardant360 CDx test was the first comprehensive liquid biopsy test approved by the U.S.

Food and Drug Administration, or the FDA, to provide tumor mutation profiling with solid tumors and to be used as a companion diagnostic in connection with non-small cell lung cancer, or NSCLC.

In February 2021, we launched our Guardant Reveal liquid biopsy-based tests for residual and recurring cancer to first address the need in Stage II-III colorectal cancer.

In June 2021, we launched Guardant360 TissueNext, our first tissue-based test which will be used to identify patients with advanced cancer who may benefit from biomarker-informed treatment, and Guardant360 Response which will be used to measure early indications to patients' response to treatment up to eight weeks earlier than response evaluation criteria in solid tumors.

We have also developed our GuardantINFORM platform to further accelerate precision oncology drug development by biopharmaceutical companies by offering them an in-silico research platform to unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers.

We perform our tests in our clinical laboratory located in Redwood City, California.

Our laboratory is certified pursuant to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, permitted by the New York State Department of Health, or NYSDOH, and licensed in California and four other states.

We are a leading precision oncology company focused on helping conquer cancer globally through the use of our proprietary tests, vast data sets and advanced analytics.

We believe our tests can transform cancer care by unlocking insights that will help patients at all stages of the disease, including at its earliest stages, when it’s most treatable.

For patients with advanced-stage cancer, we have commercially launched Guardant360 LDT and Guardant360 CDx, the first comprehensive liquid biopsy test approved by the U.S.

Food and Drug Administration, or the FDA, to provide tumor mutation profiling with solid tumors and to be used as a companion diagnostic in connection with non-small cell lung cancer, or NSCLC, and breast cancer.

We have also launched the Guardant360 TissueNext tissue test for advanced-stage cancer, Guardant Reveal blood test to detect residual and recurring disease in early-stage colorectal, breast and lung cancer patients, and Guardant360 Response blood test to predict patient response to immunotherapy or targeted therapy eight weeks earlier than current standard-of-care imaging.

We also collaborate with biopharmaceutical companies in clinical studies by providing the above-mentioned tests, as well as the GuardantOMNI blood test for advanced-stage cancer, and the GuardantINFINITY blood test, launched in September 2022, which is a next-generation smart liquid biopsy that provides new, multi-dimensional insights into the complexities of tumor molecular profiles and immune response to advance cancer research and therapy development.

Using data collected from our tests, we have also developed our GuardantINFORM platform to help biopharmaceutical companies accelerate precision oncology drug development through the use of this in-silico research platform to unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers.

In May 2022, we launched the Shield LDT test to address the needs of individuals eligible for colorectal cancer screening.

From a simple blood draw, Shield uses a novel multimodal approach to detect colorectal cancer signals in the bloodstream, including DNA that is shed by tumors.

In addition, in December 2022, we announced positive results from ECLIPSE, an over 20,000 patient registrational study evaluating the performance of our Shield blood test for detecting colorectal cancer in average-risk adults.

We also expect to expand into lung and multi-cancer screening with our investigational, next-generation Shield assay.

We currently perform our tests in our laboratories located in Redwood City, California, and San Diego, California.

Our Redwood City laboratory is certified pursuant to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, permitted by the New York State Department of Health, or NYSDOH, and licensed in California and four other states.

Our San Diego laboratory is CAP-accredited and CLIA-certified.

In addition, our Palo Alto, California laboratory is currently operated as a center for our research and technology development.

In February 2022, we received CAP accreditation for our laboratory in Japan where we expect to commence processing samples following receipt of additional certification for processing In Vitro Diagnostic, or IVD, samples and reimbursement approval.

We generated total revenue of $449.5 million, $373.7 million and $286.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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We have funded our operations to date principally from the sale of our stock, convertible senior notes, and revenue from our precision oncology testing and development services and other.

In May 2019, we completed an underwritten public offering of a total of 5,175,000 shares of our common stock, through which we received net proceeds of $349.7 million after deducting underwriting discounts and commissions and offering expenses payable by us.

In June 2020, we completed an underwritten public offering of a total of 4,312,500 shares of our common stock, through which we received net proceeds of $354.6 million after deducting underwriting discounts and commissions and offering expenses payable by us.

In November 2020, we issued our convertible senior notes with an aggregate principal amount of $1.15

As of December 31, 2021, we had cash, cash equivalents and marketable securities of approximately $1.6 billion.

In November 2020, we issued our convertible senior notes with an aggregate principal amount of $1.15 billion.

As of December 31, 2022, we had cash, cash equivalents and marketable debt securities of approximately $1.0 billion.

Factors affecting our performance

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Estimation of the impact of the potential for changes in reimbursement requires significant judgment and considers payers' past patterns of changes in reimbursement as well as any stated plans to implement changes.

Any cash collections over the expected reimbursement period exceeding the estimated variable consideration is recorded in future periods based on actual cash received.

Any cash collections over the expected reimbursement period exceeding the estimated variable consideration are recorded in future periods based on actual cash received.

Payment from commercial payers can vary depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider”.

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If their policies were to change in the future to cover additional cancer indications, we anticipate that our total reimbursement would increase.

In March 2020, we began to receive reimbursement from Medicare for claims submitted, with respect to Guardant360 clinical tests performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin other than NSCLC.

In May 2020, Noridian issued a coverage article and confirmed limited Medicare coverage for our Guardant360 test for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin who meet the criteria of Medicare’s National Coverage Determination for Next Generation Sequencing established in March 2018.

Following the FDA approval of our Guardant360 CDx test, a new Z-Code Identifier was issued in August 2020.

In January 2021, a proprietary laboratory analyses, or PLA code was issued for our Guardant360 CDx with an effective date in April 2021.

Additionally, based on this new PLA code, we applied to the Centers for Medicare and Medicaid Services or CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT.

Additionally, based on this new PLA code, we applied to the CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT.

In March 2021, CMS approved ADLT status to the Guardant360 CDx test, based on which Medicare paid us at the lowest available commercial rate per test, from April 1, 2021 to December 31, 2021.

After this period, Medicare would reimburse Guardant360 CDx services at the median rate of claims paid by commercial payers.

We are in the process of negotiating reimbursement for our Guardant Reveal, Guardant Response and Guardant360 TissueNext tests from commercial and governmental payers.

Due to the inherent

variability and unpredictability of the reimbursement landscape, including related to the amount that payers reimburse us for any of our tests, we estimate the amount of revenue to be recognized at the time a test is provided and record revenue adjustments if and when the cash subsequently received for a test differs from the revenue recorded for the test.

Effective January 1, 2022, Medicare has started to reimburse Guardant360 CDx services at the median rate of claims paid by commercial payers and this rate will apply until December 2023.

In March 2022, Palmetto GBA, the Medicare administrative contractor for MolDX, has conveyed coverage for our Guardant360 TissueNext test under the existing local coverage determination.

The policy covers our Guardant360 TissueNext test for Medicare fee-for-service patients with advanced solid tumor cancers.

In July 2022, Palmetto GBA conveyed coverage for our Guardant Reveal test for fee-for-service Medicare patients in the United States with stage II or III colorectal cancer whose testing is initiated within three months following curative intent therapy, with an effective date of December 2021.

Due to the inherent variability and unpredictability of the reimbursement landscape, including related to the amount that payers reimburse us for any of our tests, we estimate the amount of revenue to be recognized at the time a test is provided and record revenue adjustments if and when the cash subsequently received differs from the revenue recorded.

Due to this variability and unpredictability, previously recorded revenue adjustments are not indicative of future revenue adjustments from actual cash collections, which may fluctuate significantly.

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As we continue to develop these relationships, we expect to support a growing number of clinical studies globally and continue to have opportunities to offer our platform to such customers for development services, including companion diagnostic development, novel target discovery and validation, as well as clinical study enrollment.

For example, our tests are being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen, Daiichi Sankyo, Janssen Biotech and Radius Health.

For example, our tests are being developed as companion diagnostics under collaborations with biopharmaceutical companies.

• Research and development.

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In particular, we have invested heavily in clinical studies as we believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers.

With respect to Guardant Reveal, in 2021, we initiated a 1,000-patient prospective, observational, multi-center study, which we refer to as the ORACLE study, designed to evaluate the performance of our Guardant Reveal liquid biopsy test to predict cancer recurrence after curative intent treatment, across 11 solid tumor types.

With respect to Guardant SHIELD, we completed enrollment toward a prospective screening study, which we refer to as the ECLIPSE study, aiming to evaluate the performance of our Guardant SHIELD assay in detecting colorectal cancer in average-risk adults.

In addition, in early 2022, we enrolled the first patient in a nearly 10,000-patient prospective, registrational study, which we refer to as the SHIELD study, to evaluate the performance of our next-generation Guardant SHIELD assay in detecting lung cancer in high-risk individuals ages 50-80 and the study is anticipated to run in approximately 100 centers in the United States and Europe.

We have expended considerable resources, and expect to increase such expenditures over the next few years, to support our research and development programs with the goal of fueling further innovation.

With respect to Guardant Reveal, in October 2021, we initiated a 1,000-patient prospective, observational, multi-center study, which we refer to as the ORACLE study, designed to evaluate the performance of our Guardant Reveal liquid biopsy test to predict cancer recurrence after curative intent treatment, across 11 solid tumor types.

In addition, with respect to Guardant Reveal, in December 2022, we entered into a partnership with Susan G.

Komen®, the world’s leading breast cancer organization, to bring the patient perspective to the development of clinical studies that help identify early-stage breast cancer patients who are at high risk of disease recurrence and may benefit from additional monitoring or therapy.

With respect to Shield, in December 2022, we announced positive results from ECLIPSE, an over 20,000 patient registrational study evaluating the performance of our Shield blood test for detecting colorectal cancer in average-risk adults.

The test demonstrated 83% sensitivity in detecting individuals with colorectal cancer.

Specificity was 90% in both individuals without advanced neoplasia and in those who had a negative colonoscopy result.

These results exceed the performance criteria set forth by the CMS for reimbursement.

This test also demonstrated 13% sensitivity in detecting advanced adenomas.

Based on these study results, we plan to complete our premarket approval submission to the FDA in the first quarter of 2023.

In addition, to evaluate the performance of our investigational, next-generation Shield assay in detecting lung cancer in high-risk individuals ages 50-80, in January 2022, we enrolled the first patient in a nearly 10,000-patient prospective, registrational study, which we refer to as the SHIELD LUNG study.

The study is anticipated to run in approximately 100 centers in the United States and Europe.

We are continuing to enroll more patients for these on-going studies, and have expended considerable resources, and expect to increase such expenditures over the next few years, to support our research and development programs with the goal of fueling further innovation.

• International expansion.

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We currently offer our tests in countries outside the United States primarily through distributor relationships, direct contracts with hospitals or partnerships with research organizations.

In May 2018, we formed and capitalized a joint venture, Guardant Health AMEA, Inc., which we refer to as the Joint Venture, with SoftBank, relating to the sale, marketing and distribution of our tests generally outside the Americas and Europe.

We expect to rely on the Joint Venture to accelerate commercialization of our products in Asia, the Middle East and Africa.

In May 2018, we formed and capitalized a joint venture, Guardant Health AMEA, Inc., with SoftBank, which we refer to as the Joint Venture or Guardant AMEA, relating to the sale, marketing and distribution of our tests generally outside the Americas and Europe, and to accelerate commercialization of our products in Asia, the Middle East and Africa.

In November 2021, we exercised our call right contained in the joint venture agreement with SoftBank to purchase all of the shares held by SoftBank and its affiliates in consideration for the payment of the aggregate purchase price to be determined based on an independent third-party valuation.

The aggregate purchase price will be no less than an amount that yields a 20% internal rate of return on the $41.0 million of capital invested by SoftBank in May 2018 as stipulated in the joint venture agreement.

SoftBank and us have initiated a process to determine the independent valuation of the Joint Venture, which includes the appointment of independent appraisers by both SoftBank and us.

We expect to complete this transaction before the end of the second quarter of 2022.

Upon our exercise of the call right in November 2021, SoftBank no longer had the option to exercise its put right.

In June 2022, we purchased all of the shares held by SoftBank and its affiliates in consideration for a cash payment of the aggregate purchase price of $177.8 million, as determined by an independent valuation firm, which resulted in $99.8 million of fair value adjustments to the noncontrolling interest liability for the year ended December 31, 2022.

Upon completion of the transaction, we obtained full control over operations throughout the Asia, Middle East and Africa region.

In December 2020, we signed our first public private partnership agreement with Vall D'Hebron Institute of Oncology, or VHIO, one of Europe’s leading cancer research institutions, and in May 2022, the first blood-based cancer testing services in Europe based on our industry-leading digital sequencing platform became available at the VHIO testing facility in Spain.

In October 2021, we signed a partnership agreement with The Royal Marsden NHS Foundation Trust, a premier cancer center within the United Kingdom for patient care, research and teaching of all types of cancer.

We expect these partnerships will lead to the establishment of our testing services at the partner laboratories, using our digital sequencing technology, as well as generation of clinical and economic evidence to support commissioning in other areas of Europe.

In June 2022, we signed a strategic partnership agreement with Adicon Holdings Limited, a leading independent clinical laboratory company based in China, to offer our industry-leading comprehensive genomic profiling tests to biopharmaceutical companies conducting clinical studies in China.

We expect the partnership to help biopharmaceutical companies bring the next generation of cancer therapies to patients in the region.

The success of our international expansion strategy depends on a number of factors, including the internal and external constraints placed on our international laboratory partners and biopharmaceutical companies in the context of broader global, regional and U.S.

economic and geopolitical conditions.

For example, deterioration in the bilateral relationship between the United States and China may impact international trade, government spending, regional stability and macroeconomic conditions.

The impact of these potential developments, including any resulting sanctions, export controls or other restrictive actions that may be imposed against governmental or other entities in, for example, China, may contribute to disruption of our international partnerships and instability and volatility in the global markets, which in turn could adversely impact our operations and weaken our financial results.

• Sales and marketing expense .

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• COVID-19 Global Pandemic .

The global outbreak of coronavirus 2019, or COVID-19, has disrupted, and we expect will continue to disrupt, our operations.

To protect the health and well-being of our workforce, partners, vendors and customers, we have provided free COVID-19 testing for all of our employees, contractors and their dependents, implemented social distance and building entry policies at work, and followed California’s public health orders and the guidance from the Centers for Disease Control and Prevention.

The COVID-19 global pandemic has negatively affected, and we expect will continue to negatively affect, our revenue and our clinical studies.

The global coronavirus 2019, or COVID-19, pandemic has negatively affected, and we expect will continue to negatively affect, our revenue and our clinical studies.

For example, our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical studies to advance their pipelines, for which our tests could be utilized.

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private payers.

We submit claims to Medicare for reimbursement for Guardant360 clinical testing performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin and for Guardant360 CDx clinical testing performed for qualifying patients diagnosed with solid tumor cancers who meet the criteria of Medicare’s National Coverage Determination for Next Generation Sequencing established since March 2018.

We also submit claims to Medicare for reimbursement for our Guardant360 CDx, Guardant360 LDT, Guardant360 TissueNext and Guardant Reveal clinical testing performed for qualifying patients.

Revenue from clinical tests for patients covered by Medicare represented approximately 45%, 45% and 42% of our precision oncology revenue from clinical customers for the years ended December 31, 2022, 2021 and 2020, respectively.

Development services and other.

Development services and other revenue primarily represents services, other than precision oncology testing, that we provide to biopharmaceutical companies and large medical institutions.

Development services revenue primarily represents services that we provide to biopharmaceutical companies, large medical institutions and international laboratory partners.

We collaborate with biopharmaceutical companies in the development and clinical studies of new drugs.

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Under these arrangements, we generate revenue from progression of our collaboration efforts, as well as from provision of on-going support.

In addition to companion diagnostic development and regulatory approval services, we also provide clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, GuardantINFORM, and kits fulfillment related services for our biopharmaceutical customers.

In addition, we derive royalty revenues from licensing our technology.

Development services and other revenue can vary over time as different projects start and complete.

In addition to companion diagnostic development and regulatory approval services, we also provide other development services, including clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect and GuardantINFORM.

Other revenue includes amounts derived from licensing our technologies, and kit fulfillment.

Costs and operating expenses

Cost of precision oncology testing.

Cost of precision oncology testing generally consists of cost of materials, inventory write-downs, direct labor, including employee benefits, bonus, and stock-based compensation;

equipment and infrastructure expenses associated with processing test samples, such as sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples;

Cost of precision oncology testing generally consists of cost of materials, including inventory write-downs;

cost of labor, including employee benefits, bonus, and stock-based compensation;

equipment and infrastructure expenses associated with processing test samples, such as sample accessioning, library preparation, sequencing, and quality control analyses;

curation of test results for physicians;

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Infrastructure expenses include depreciation of laboratory equipment, rent costs, depreciation of leasehold improvements and information technology costs.

Costs associated with performing our tests are recorded as the tests are performed regardless of whether revenue was

recognized with respect to the tests.

Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized.

One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents.

While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors.

Costs associated with performing our tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to the tests.

While we do not believe the technologies underlying the third-party licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors.

We expect the cost of precision oncology testing to generally increase in line with the increase in the number of tests we perform, but we expect the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions.

Cost of development services and other.

Cost of development services and other primarily includes costs incurred for the performance of development services requested by our customers comprising of direct labor and material costs including any inventory write-downs.

Cost of development services and other primarily includes costs incurred for the performance of development services and other requested by our customers comprising of labor and material costs including any inventory write-downs.

For development of new products, costs incurred before technological feasibility has been achieved are reported as research and development expenses, while costs incurred thereafter are reported as cost of revenue.

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These expenses consist principally of salaries, bonuses, employee benefits, travel expenses and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses.

We expect that our general and administrative expenses will continue to increase in absolute dollars, primarily due to increased stock-based compensation expense, including resulting from the market-based restricted stock units granted to our Co-Chief Executive Officers in May 2020.

We expect that our general and administrative expenses will continue to increase as we incur additional costs to support the growth of our business.

These expenses, though expected to increase in absolute dollars, are expected to decrease modestly as a percentage of revenue in the long term, though they may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses being incurred.

Interest income

Interest income consists of interest earned on our cash, cash equivalents and marketable securities.

Interest income consists of interest earned on our cash, cash equivalents and marketable debt securities.

Interest expense

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Other income (expense), net

Other income (expense), net consists of foreign currency exchange gains and losses, non-recurring payments due and received in relation to the settlement of license and patent disputes, net of credit losses, and the relief fund grant

from the Department of Health and Human Services, or HHS, under the U.S.

Other income (expense), net consists of foreign currency exchange gains and losses, fair value adjustments of marketable equity securities, impairment of other assets, non-recurring payments due and received in relation to the settlement of license and patent disputes, net of credit losses, and the relief fund grant from the Department of Health and Human Services, or HHS, under the U.S.

Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.

We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

Provision for (Benefit from) income tax

Provision for income tax

Income taxes are recorded using an asset and liability approach.

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The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues.

The provision for (benefit from) income taxes includes the effects of any accruals that we believe are appropriate, as well as the related net interest and penalties.

The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related net interest and penalties.

Results of operations

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Other income (expense), net (12,778) 25,178

Fair value adjustments of noncontrolling interest liability (99,785) —

Loss before provision for income taxes

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Precision oncology revenue from tests for clinical customers was $298.1 million for the year ended December 31, 2022, up 26% from $236.4 million for the year ended December 31, 2021.

This increase in clinical testing revenue was driven primarily by an increase in sample volume related to our Guardant360 LDT and Guardant360 CDx tests, and an overall increase in the average selling price per Guardant360 CDx test primarily due to ADLT status being received from Medicare effective April 1, 2021.

Tests for clinical customers increased to 87,600 for year ended December 31, 2021, from 63,254 for the year ended December 31, 2020.

This increase in clinical testing revenue was driven primarily by an increase in sample volume related to our Guardant360 CDx and Guardant360 LDT tests, and revenue from products launched in 2021, including Guardant Reveal, Guardant360 Response and Guardant 360 TissueNext.

Total tests for clinical customers increased to approximately 124,800 for year ended December 31, 2022, from approximately 87,600 for the year ended December 31, 2021.

Precision oncology revenue from tests for biopharmaceutical customers was $94.0 million for the year ended December 31, 2022, and $67.9 million for the year ended December 31, 2021, respectively.

The increase in revenue was primarily due to an increase in tests, partially offset by a decrease in average selling price per test primarily due to a greater proportion of such tests being the Guardant360 tests, which have a lower average selling price than the GuardantOMNI tests.

Tests for biopharmaceutical customers increased to 18,600 for the year ended December 31, 2021, from 15,983 for the year ended December 31, 2020, primarily due to an increase in the number of biopharmaceutical customers and their contracted projects.

Development services and other revenue increased to $69.3 million for the year ended December 31, 2021, from $50.4 million for the year ended December 31, 2020, an increase of $18.9 million, or 38%.

This increase in development services and other revenue was primarily due to the progression of collaboration projects with biopharmaceutical customers for companion diagnostic development services, including receipt of milestone payments for regulatory approval of two of our companion diagnostic programs during the year ended December 31, 2021, and royalty revenues earned during the year ended December 31, 2021, pursuant to a settlement and license agreement entered into in December 2021.

Our revenue may be adversely impacted by the COVID-19 pandemic in future periods depending on the duration and severity of the pandemic and the impact of any variants of the virus.

Costs of Revenue and Gross Margin

This increase in revenue was primarily due to an increase in sample volume, including our GuardantINFINITY test launched in 2022.

Total tests for biopharmaceutical customers increased to approximately 26,000 for the year ended December 31, 2022, from approximately 18,600 for the year ended December 31, 2021, primarily due to an increase in the number of biopharmaceutical customers and their contracted projects.

Development services and other revenue decreased to $57.5 million for the year ended December 31, 2022, from $69.3 million for the year ended December 31, 2021, a decrease of $11.9 million, or 17%.

This decrease in development services and other revenue was primarily due to the change in collaboration projects with biopharmaceutical customers for companion diagnostic development and regulatory approval services, and discontinuation of our Guardant-19 tests in August 2021, partially offset by revenues earned from licensing our technologies, and providing data services during the year ended December 31, 2022.

Cost of Revenue

Year Ended December 31, Change

(in thousands)

Cost of revenue

Cost of precision oncology testing

$ 148,199 $ 110,396 $ 37,803 34 %

Gross profit $ 250,741 $ 194,195

Gross margin 67 % 68 %

Cost of revenue was $122.9 million for the year ended December 31, 2021, compared to $92.5 million for the year ended December 31, 2020, an increase of $30.4 million, or 33%.

Cost of precision oncology testing revenue was $110.4 million for the year ended December 31, 2021, compared to $74.8 million for the year ended December 31, 2020, an increase of $35.6 million, or 48%.

Cost of development services and other 8,126 12,516 (4,390) (35) %

Total cost of revenue

$ 156,325 $ 122,912 $ 33,413 27 %

Total cost of revenue was $156.3 million for the year ended December 31, 2022, compared to $122.9 million for the year ended December 31, 2021, an increase of $33.4 million, or 27%.

Cost of precision oncology testing was $148.2 million for the year ended December 31, 2022, compared to $110.4 million for the year ended December 31, 2021, an increase of $37.8 million, or 34%.

This increase in cost of precision oncology testing was primarily attributable to an increase in sample volumes, resulting in a $16.7 million increase in material costs, a $11.2 million increase in production labor and overhead costs, and a $10.0 million increase in other costs, including costs related to kits, freight and curation of test results for physicians.

Cost of development services and other was $8.1 million for the year ended December 31, 2022, compared to $12.5 million for the year ended December 31, 2021, a decrease of $4.4 million, or 35%.

This decrease in cost of development services and other was primarily due to a decrease in labor costs and materials, related to the progression of companion diagnostic development and regulatory approval service contracts.

Gross margin for the year ended December 31, 2021 was 67%, compared to 68% for the year ended December 31, 2020.

The decrease in gross margin was primarily due to lower average selling price and higher average cost per test resulting from the varied product mix of precision oncology testing, partially offset by gross margin improvement of development services and other.

The improvement of development services and other gross margin was primarily attributable to royalty revenues earned pursuant to a settlement and license agreement entered into in December 2021, and receipt of milestone payments for regulatory approval of two for our companion diagnostic programs in 2021.

Our gross margin may be adversely impacted by the COVID-19 pandemic depending on how long the pandemic lasts and the severity of the situation in coming quarters.

This decrease in cost of development services and other was primarily due to a decrease in labor and material costs, related to the discontinuation of our Guardant-19 tests in August 2021, and the change in companion diagnostic development and regulatory approval service contracts, partially offset by costs associated with providing screening testing services and licensing our technologies.

Operating Expenses

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Research and development expenses were $373.8 million for the year ended December 31, 2022, compared to $263.2 million for the year ended December 31, 2021, an increase of $110.6 million, or 42%.

This increase in research and development expense was primarily due to an increase of $49.7 million in personnel-related costs for employees in our research and development group, including a $8.9 million increase in stock-based compensation, as we increased our headcount to support continued investment in our technology.

The increase was also attributable to an increase of $32.7 million in material costs related to various programs, an increase of $21.2 million in development consulting fees, an increase of $12.3 million related to allocated facility and information technology infrastructure costs, and an increase of $4.9 million in depreciation and amortization costs, partially offset by a decrease of $8.5 million relating to in-process research and development (IPR&D) technology expensed in connection with a patent license acquisition that occurred in March 2020.

This increase in research and development expense was primarily related to continued investment in the development of our technologies and products, and our clinical studies, resulting in an increase of $48.8 million in outside service fees, an increase of $36.4 million in personnel-related costs for employees in our research and development group, including a $7.7 million increase in stock-based compensation, an increase of $25.3 million related to allocated facilities and information technology infrastructure costs, an increase of $5.2 million in post-acquisition related contingent consideration, and an increase of $4.1 million in depreciation and amortization, partially offset by a decrease of $11.5 million in material costs.

Sales and marketing expense

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Selling and marketing expenses were $299.8 million for the year ended December 31, 2022, compared to $191.9 million for the year ended December 31, 2021, an increase of $107.9 million, or 56%.

This increase was primarily due to an increase of $58.9 million in personnel-related costs, including a $6.2 million increase in stock-based compensation, associated with the expansion of our commercial organization, an increase of $12.0 million related to allocated facilities and information technology infrastructure costs, an increase of $10.6 million in professional service expenses related to marketing activities, and an increase of $3.5 million in office administrative costs.

This increase was primarily related to commercial infrastructure buildout and marketing activities to support existing products and new product launch, resulting in an increase of $74.0 million in personnel-related costs, including a $10.0 million increase in stock-based compensation, an increase of $14.2 million related to marketing activities, an increase of $9.8 million in office administrative costs, and an increase of $9.4 million related to allocated facilities and information technology infrastructure costs.

General and administrative expense

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$ 163,956 $ 206,640 $ (42,684) (21) %

General and administrative expenses were $206.6 million for the year ended December 31, 2021, compared to $192.8 million for the year ended December 31, 2020, an increase of $13.9 million, or 7%.

This increase was primarily due to an increase of $9.0 million in personnel-related costs, as we increased our headcount to support the

business growth, an increase of $7.4 million in professional service expenses related to outside legal, accounting, consulting and IT services, an increase of $5.3 million related to allocated facilities and information technology infrastructure costs, and an increase of $2.0 million in office administrative costs, partially offset by a decrease of $9.4 million in stock-based compensation, as tranche 1 of the market-based restricted stock units issued to our Co-Chief Executive Officers were fully vested as of January 1, 2021, and a decrease of $1.2 million related to settlement costs in connection with a patent license acquisition that occurred in March 2020.

General and administrative expenses were $164.0 million for the year ended December 31, 2022, compared to $206.6 million for the year ended December 31, 2021, a decrease of $42.7 million, or 21%.

This decrease was primarily due to a decrease of $76.5 million in stock-based compensation, as the market-based restricted stock units issued to our Co-Chief Executive Officers were fully expensed as of June 2022, partially offset by an increase of $17.6 million in professional service expenses related to outside legal, accounting, consulting and IT services, an increase of $7.1 million in personnel costs, in line with our business expansion, and an increase of $5.5 million related to allocated facilities and information technology infrastructure costs.

Interest income

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$ 6,069 $ 3,930 $ 2,139 54 %

Interest income was $3.9 million for the year ended December 31, 2021, compared to $10.2 million for the year ended December 31, 2020, a decrease of $6.2 million, or 61%.

This decrease was primarily due to a significant decrease in interest rate as the U.S.

Federal Reserve lowered the risk-free interest rate to nearly zero, offset by a significant increase in cash, cash equivalents and marketable securities related to the receipt of cash proceeds from our follow-on public offering completed in June 2020 and borrowings on our convertible senior notes issued in November 2020.

Interest income was $6.1 million for the year ended December 31, 2022, compared to $3.9 million for the year ended December 31, 2021, an increase of $2.1 million, or 54%, primarily due to higher U.S.

treasury interest rates, partially offset by a decrease in cash and cash equivalents and marketable debt securities balances.

Interest expense

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$ (2,577) $ (2,577) $ — — %

Interest expense was $2.6 million for the year ended December 31, 2021, compared to $4.8 million for the year ended December 31, 2020, a decrease of $2.2 million, or 46%.

For the year ended December 31, 2021, interest expense was primarily attributable to amortization of issuance costs, and for the year ended December 31, 2020, interest expense was primarily attributable to amortization of debt discount and debt issuance costs, related to our convertible senior notes issued in November 2020.

The decrease was due to the impact of adopting ASU 2020-06 in 2021.

Interest expense was primarily attributable to the amortization of debt issuance costs related to our convertible senior notes issued in November 2020, for the years ended December 31, 2022, and 2021.

Other income (expense), net

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* Not meaningful

For the year ended December 31, 2022, other income (expense), net was primarily related to $7.8 million of unrealized loss recorded for our marketable equity securities, and $5.3 million of impairment for the rights to purchase one of our non-marketable security investees.

For the year ended December 31, 2021, other income (expense), net primarily included $25.0 million related to the one-time payment pursuant to a settlement and license agreement entered into in December 2021.

For the year ended December 31, 2020 , other income (expense), net primarily included $1.8 million received from HHS’s relief fund under the CARES Act, and $1.0 million received in connection with settlement of a patent dispute.

Fair value adjustments of noncontrolling interest liability

Year Ended December 31, Change

(in thousands)

Fair value adjustments of noncontrolling interest liability

$ (99,785) $ — $ (99,785) *

* Not meaningful

Fair value adjustments of noncontrolling interest liability for the year ended December 31, 2022 was made as a result of the Joint Venture Acquisition completed in June 2022.

Provision for income taxes

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$ 1,139 $ 300 $ 839 280 %

Provision for income taxes was immaterial for both of the years ended December 31, 2021 and 2020.

The change in the provision for income taxes between the years ended December 31, 2022 and 2021 was insignificant.

Quarterly results of operations

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the

eight quarters in the 24-month period ended December 31, 2021.

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the 24-month period ended December 31, 2022.

The information for each of these quarters has been prepared in accordance with generally accepted accounting principles in the United States of America and on the same basis as our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Other income (expense), net 5,281 (18,389) 378 (48) 25,898 (187) (243) (290)

Fair value adjustments of noncontrolling interest liability — — (99,785) — — — — —

Loss before provision for income taxes

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We have funded our operations to date principally from the sale of stock, convertible debt and through revenue from precision oncology testing and development services and other.

As of December 31, 2021, we had cash and cash equivalents of $492.2 million and marketable securities of $1.1 billion.

As of December 31, 2022, we had cash and cash equivalents of $141.6 million and marketable debt securities of $869.6 million.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to provide liquidity while ensuring capital preservation.

Additionally, we have investments held in marketable securities consisting of United States treasury securities that can be immediately liquid.

Based on our current business plan, we believe our current cash, cash equivalents and marketable securities and anticipated cash flows from operations, will be sufficient to meet our anticipated cash requirements for more than 12 months from the date of this Annual Report on Form 10-K.

Additionally, we have investments held in marketable debt securities consisting of United States treasury securities that can be immediately liquid.

Based on our current business plan, we believe our current cash, cash equivalents and marketable debt securities and anticipated cash flows from operations, will be sufficient to meet our anticipated cash requirements for more than 12 months from the date of this Annual Report on Form 10-K.

We may consider raising additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons.

As revenue from precision oncology testing and development services and other is expected to grow long-term, we expect our accounts receivable and inventory balances to increase.

Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.

If our available cash, cash equivalents and marketable securities and anticipated cash flows from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from our customers or other risks described in this Annual Report on Form 10-K, we may seek to sell additional common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing.

Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued liabilities, which could impact our working capital balances.

If our available cash, cash equivalents and marketable debt securities and anticipated cash flows from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from our customers or other risks described in this Annual Report on Form 10-K, we may seek to sell additional common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing.

The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock.

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Net cash used in operating activities $ (309,463) $ (209,017)

Net cash used in investing activities (63,155) (617,086)

Net cash (used in) provided by financing activities (66,824) 1,410,307

Net cash provided by (used in) investing activities 149,816 (63,155)

Net cash used in financing activities (189,093) (66,824)

Operating activities

Cash used in operating activities during the year ended December 31, 2022 was $309.5 million, which resulted from a net loss of $654.6 million, partially offset by non-cash charges of $283.6 million and net change in our operating assets and liabilities of $61.6 million.

Non-cash charges primarily consisted of $99.8 million of fair value adjustments of noncontrolling interest liability in connection with the Joint Venture Acquisition, $94.7 million of stock-based compensation, $36.0 million of depreciation and amortization, $28.6 million of non-cash operating lease costs, $7.8 million of unrealized losses on marketable equity securities, $5.3 million of impairment on the rights to purchase one of our non-marketable security investees, $4.6 million of amortization of premium on marketable debt security investments, $4.3 million of revaluation adjustments to contingent consideration, and $2.6 million of amortization of debt issuance costs.

The net change in our operating assets and liabilities was primarily the result of a $60.3 million increase in accounts payable and accrued liabilities, primarily due to increase in purchases of goods and services, increased personnel and increase in accrued and other liabilities, a $20.4 million decrease in prepaid expenses and other current assets, primarily driven by a $25.0 million one-time payment pursuant to a settlement and license agreement entered into in December 2021, a $11.7 million decrease in other assets, and a $9.9 million increase in deferred revenue primarily due to upfront payments from international laboratory partners, partially offset by a $20.9 million increase in inventory, net due to forecasted higher testing volumes, and increased inventory level to offset potential disruption in supply chain, and a $20.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance.

Cash used in operating activities during the year ended December 31, 2021 was $209.0 million, which resulted from a net loss of $384.8 million and net change in our operating assets and liabilities of $40.5 million, partially offset by non-cash charges of $216.2 million.

Non-cash charges primarily consisted of $151.4 million of stock-based compensation, $24.7 million of non-cash operating lease costs, $22.3 million of depreciation and amortization, $12.8 million of amortization of premium on investment, $2.6 million of amortization of debt issuance costs, and $2.4 million of revaluation adjustments to contingent consideration.

The net change in our operating assets and liabilities was primarily the result of a $44.4 million increase in accounts receivables driven by increased sales to clinical and biopharmaceutical customers, and royalty revenues earned pursuant to a settlement and license agreement entered into in December 2021, a $35.8 million increase in prepaid expenses and other current assets, primarily driven by a $25.0 million one-time payment pursuant the above-mentioned settlement and license agreement, a $8.0 million increase in inventory due to higher testing volumes, and a $4.2 million increase in other assets, partially offset by a $14.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance, a $14.2 million increase in accrued compensation due to increased personnel, a $11.9 million increase in accrued expense and other liabilities, a $8.6 million increase in accounts payable, and a $2.8 million increase in deferred revenue.

Cash used in operating activities during the year ended December 31, 2020 was $103.9 million, which resulted from a net loss of $246.3 million and net change in our operating assets and liabilities of $47.7 million, partially offset by non-cash charges of $190.0 million.

Non-cash charges primarily consisted of $144.1 million of stock-based compensation, $16.1 million of depreciation and amortization, $8.5 million of charge of in-process research and

development costs with no alternative future use, $7.2 million of credit loss adjustment and others, $5.6 million of non-cash operating lease costs, $4.7 million of amortization of debt discount and debt issuance costs, and $4.0 million of amortization of premium on investment.

The net change in our operating assets and liabilities was primarily the result of a $19.3 million increase in other assets for security deposits relating to new leases we entered into in 2020, a $7.9 million decrease in accounts payable, a $7.5 million increase in inventory due to higher testing volumes, a $6.1 million increase in prepaid expenses and other current assets, a $6.0 million payment of operating lease liabilities net of receipt of tenant improvement allowance, a $5.5 million increase in accounts receivables driven by increased sales to biopharmaceutical customers, and a $3.7 million decrease in deferred revenue, partially offset by a $9.7 million increase in accrued compensation due to increased personnel.

The net change in our operating assets and liabilities was primarily the result of a $44.4 million increase in accounts receivables driven by increased sales to clinical and biopharmaceutical customers, and royalty revenues earned pursuant to a settlement and license agreement entered into in December 2021, a $35.8 million increase in prepaid expenses and other current assets, primarily driven by a $25.0 million one-time payment pursuant the above-mentioned settlement and license agreement, a $8.0 million increase in inventory, net due to higher testing volumes, and a $4.2 million increase in other assets, partially offset by a $34.8 million increase in accounts payable and accrued liabilities, primarily due to increase in purchases of goods and services, increased personnel and increase in accrued and other liabilities, a $14.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance, and a $2.8 million increase in deferred revenue.

Investing activities

Cash used in investing activities during the year ended December 31, 2021 was $63.2 million, which resulted primarily from purchases of marketable securities of $900.8 million, purchases of property and equipment of $75.0 million, and purchases of non-marketable equity and other related investments of $39.4 million, partially offset by proceeds from the maturities of marketable securities of $952.1 million.

Cash used in investing activities during the year ended December 31, 2020 was $617.1 million, which resulted primarily from purchases of marketable securities of $1.1 billion, purchases of property and equipment of $36.2 million, and purchase of intangible assets of $17.9 million, partially offset by proceeds from the maturities of marketable securities of $562.5 million.

Cash provided by investing activities during the year ended December 31, 2022 was $149.8 million, which resulted primarily from maturities of marketable debt securities of $555.0 million, partially offset by purchases of marketable debt securities of $303.8 million, purchases of property and equipment of $77.5 million, and purchases of non-marketable equity and other related assets of $24.0 million.

Cash used in investing activities during the year ended December 31, 2021 was $63.2 million, which resulted primarily from purchases of marketable debt securities of $900.8 million, purchases of property and equipment of $75.0 million, and purchases of non-marketable equity and other related investments of $39.4 million, partially offset by maturities of marketable debt securities of $952.1 million.

Financing activities

Cash used in financing activities during the year ended December 31, 2021 was $66.8 million, which was primarily due to taxes paid related to net share settlement of restricted stock units of $83.8 million, partially offset by proceeds of $9.8 million from issuances under employee stock purchase plan, and proceeds of $8.1 million from exercise of stock options.

Cash provided by financing activities during the year ended December 31, 2020 was $1.4 billion, which was primarily due to net proceeds of $1.1 billion from borrowings on convertible senior notes, proceeds of $354.6 million from a follow-on offering of our common stock, net of underwriting discounts and commissions and offering expenses payable by us, proceeds of $9.5 million from exercise of stock options, and proceeds of $7.1 million from issuances under employee stock purchase plan, partially offset by purchases of note hedges relating to the convertible senior notes of $90.0 million, and taxes paid related to net share settlement of restricted stock units of $3.4 million.

Cash used in financing activities during the year ended December 31, 2022 was $189.1 million, which was primarily due to consideration payment for the Joint Venture Acquisition of $177.8 million, payment for the tender offer in connection with the Joint Venture Acquisition and acquisition related costs of $14.2 million, and taxes paid related to net share settlement of restricted stock units of $7.9 million, partially offset by proceeds of $9.3 million from issuances of common stock under our employee stock purchase plan, and proceeds of $2.6 million from exercise of stock options.

Cash used in financing activities during the year ended December 31, 2021 was $66.8 million, which was primarily due to taxes paid related to net share settlement of restricted stock units of $83.8 million, partially offset by proceeds of $9.8 million from issuances of common stock under our employee stock purchase plan, and proceeds of $8.1 million from exercise of stock options.

Critical accounting policies and estimates

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Revenue recognition

We derive revenue from the provision of precision oncology testing services provided to our ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to our biopharmaceutical customers.

We derive revenue from the provision of precision oncology testing services, as well as from development services and other.

Precision oncology testing services include genomic profiling and the delivery of other genomic information derived from our platform.

Development services and other include companion diagnostic development, clinical study setup, monitoring and maintenance, information solutions and laboratory services, and other miscellaneous revenue streams.

We currently receive payments from third-party commercial and governmental payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies, research institutes and international distributors.

Effective January 1, 2019, we adopted the new revenue recognition standard, Financial Accounting Standards Board, or FASB, ASC Topic 606, Revenue from Contracts with Customers, or ASC 606.

Development services include companion diagnostic development and regulatory approval, clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect and GuardantINFORM.

Other revenue includes amounts derived from licensing our technologies, and kit fulfillment.

Revenues are recognized when control of services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.

FASB ASC Topic 606, Revenue from Contracts with Customers , provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.

Precision oncology testing

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However, under certain contracts, a biopharmaceutical customer may engage us for multiple distinct development services which are both capable of being distinct and separately identifiable from other promises in the contracts and, therefore, distinct performance obligations.

We collaborate with pharmaceutical companies in the development of new drugs.

As part of these collaborations, we provide services related to regulatory filings to support companion diagnostic device submissions for our liquid biopsy panels.

We collaborate with biopharmaceutical companies in the development of new drugs.

As part of these collaborations, we provide services related to regulatory filings to support companion diagnostic device submissions for our testing panels.

Under these collaborations, we generate revenue from achievement of milestones, as well as provision of on-going support.

For development services performed, we are compensated through a combination of an upfront fee and performance-based, non-refundable regulatory and other developmental milestone payments.

The transaction price of our development services contracts typically represents variable consideration.

For the companion diagnostic development and regulatory approval services performed, we are compensated through a combination of an upfront fee and performance-based, non-refundable regulatory and other developmental milestone payments.

The transaction price of these contracts typically represents variable consideration.

Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment.

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Application of the constraint for variable consideration is assessed and updated at each reporting period as a revision to the estimated transaction price.

We recognize development services and other revenue over the period in which biopharmaceutical research and development services are provided.

We recognize companion diagnostic development and regulatory approval services revenue over the period in which biopharmaceutical research and development services are provided.

Specifically, we recognize revenue using an input method to measure progress, utilizing costs incurred to-date relative to total expected costs as its measure of progress.

We also assess the changes to the total expected cost estimates as well as any incremental fees negotiated resulting from changes to the scope of the original contract in determining the revenue recognition at each reporting period.

We assess the changes to the total expected cost estimates as well as any incremental fees negotiated resulting from changes to the scope of the original contract in determining the revenue recognition at each reporting period.

For development of new products or services under these arrangements, costs incurred before technological feasibility is reached are included as research and development expenses in our consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services and other.

We also have other miscellaneous revenue streams that are recognized in addition to development services noted above such as clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, GuardantINFORM, and kits fulfillment related revenues.

In addition, we derive sales-based royalty revenues from licensing our technologies.

Revenues related to clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, GuardantINFORM are generally recognized over time based on an input method to measure progress in the period when the associated services have been performed.

Kits fulfillment related revenues are recognized when such products are delivered.

Royalty revenues are recognized when actual sales incur.

We also recognize revenue from other development services, in addition to companion diagnostic development and regulatory approval services noted above, such as clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, and GuardantINFORM.

These revenues are generally recognized over time based on an input method to measure progress in the period when the associated services have been performed.

In addition, other revenue includes amounts derived from licensing our digital sequencing technologies to our domestic customers and international laboratory partners, and kit fulfillment.

For the licensed technology, we are compensated through royalty-based payments, non-refundable upfront payments, guaranteed minimum payments, and/or sample milestone payments.

Depending on the nature of the technology licensing arrangements, and considering factors including but not limited to enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur, when the technology transfer is complete, or during the technology transfer period.

Kit fulfillment related revenues are recognized when such products are delivered.

Contracts with multiple performance obligations

Contracts with biopharmaceutical customers may include multiple distinct performance obligations, such as provision of precision oncology testing, biopharmaceutical research and development services, and clinical study enrollment assistance, among others.

We evaluate the terms and conditions included within our contracts with biopharmaceutical customers to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together.

We first identify material promises, in contrast to immaterial promises or administrative tasks, under the contract and then evaluates whether these promises are both capable of being distinct and distinct within the context of the contract.

Contracts with biopharmaceutical customers and international laboratory partners may include multiple distinct performance obligations, such as provision of precision oncology testing, the above-mentioned development services, and digital sequencing technology licensing, among others.

We evaluate the terms and conditions included within our contracts with biopharmaceutical customers and international laboratory partners to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together.

We first identify material promises, in contrast to immaterial promises or administrative tasks, under the contract, and then evaluate whether these promises are both capable of being distinct and distinct within the context of the contract.

In assessing whether a promised service is capable of being distinct, we consider whether the customer could benefit from the service either on its own or together with other resources that are readily available to the customer, including factors such as the research, development, and commercialization capabilities of a third party as well as the availability of the associated expertise in the general marketplace.

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We determine standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin;

or by using the residual approach if standalone selling price is not observable, by reference to the total transaction price less the sum of the observable standalone selling prices of other performance obligations promised in the contract.

Variable interest entity

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Our determination about whether we should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

In May 2018, we and an affiliate of SoftBank formed and capitalized the Joint Venture for the sale, marketing and distribution of our tests in the JV Territory.

We expect to rely on the Joint Venture to accelerate commercialization of our products in Asia, the Middle East and Africa.

The Joint Venture is deemed to be a VIE and we are identified

as the primary beneficiary of the VIE.

Consequently, we have consolidated the financial position, results of operations and cash flows of the Joint Venture in our financial statements and all intercompany balances have been eliminated in consolidation.

The joint venture agreement also includes a put-call arrangement with respect to the shares of the Joint Venture held by SoftBank and its affiliates.

The noncontrolling interest held by SoftBank contains embedded put-call redemption features that are not solely within our control and has been classified outside of permanent equity in our consolidated balance sheets.

The put-call feature embedded in the redeemable noncontrolling interest do not currently require bifurcation as it does not meet the definition of a derivative and is considered to be clearly and closely related to the redeemable noncontrolling interest.

The noncontrolling interest is considered probable of becoming redeemable as SoftBank has the option to exercise its put right to sell its equity ownership in the Joint Venture to us on or after the seventh anniversary of the formation of the Joint Venture, on each subsequent anniversary of the IPO and under certain other circumstances.

We elected to recognize the change in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period.

In May 2018, we and an affiliate of SoftBank formed and capitalized the Joint Venture for the sale, marketing and distribution of our tests generally outside the Americas and Europe.

The Joint Venture was deemed to be a VIE and we were identified as the primary beneficiary of the VIE.

Consequently, we had consolidated the financial position, results of operations and cash flows of the Joint Venture in our financial statements and all intercompany balances had been eliminated in consolidation.

Prior to November 2021, the noncontrolling interest held by SoftBank contained embedded put-call redemption features that were not solely within our control and had been classified outside of permanent equity in the consolidated balance sheets.

The noncontrolling interest was considered probable of becoming redeemable as SoftBank had the option to exercise its put right to sell its equity ownership in the Joint Venture to us on or after the seventh anniversary of the formation of the Joint Venture, on each subsequent anniversary of the IPO and under certain other circumstances.

We elected to recognize the changes in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period.

As a result of exercising the call right, the noncontrolling interest has been recorded as a current liability in our consolidated balance sheet as of December 31, 2021, and future adjustments to the noncontrolling interest liability will be recorded in net loss in our consolidated statement of operations.

Upon our exercise of the call right in November 2021, SoftBank no longer had the option to exercise its put right.

In connection with exercising the call right, we reclassified $78.0 million from redeemable noncontrolling interest to noncontrolling interest liability.

In June 2022, we purchased all of the shares held by SoftBank and its affiliates in consideration for a cash payment of the aggregate purchase price of $177.8 million, which resulted in $99.8 million of fair value adjustments to the noncontrolling interest liability for the year ended December 31, 2022.

Stock-based compensation

After the adoption of Accounting Standards Update 2018-07, Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting on January 1, 2019, we measure stock-based compensation expense for stock options granted to our employees, directors, and nonemployee consultants on the date of grant based on the fair value of the awards and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective awards.

We measure stock-based compensation expense for stock options granted to our employees, directors, and nonemployee consultants on the date of grant based on the fair value of the awards and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective awards.

Compensation expense for stock options with performance metrics is calculated based upon expected achievement of the metrics specified in the grant.

We estimate the fair value of stock options granted under the 2012 Stock Plan, the 2018 Incentive Award Plan, and under the Guardant Health AMEA, Inc.'s 2020 Equity Incentive Plan for the Joint Venture, and stock purchase rights granted under our 2018 Employee Stock Purchase Plan on the grant date using the Black-Scholes option-pricing model.

We estimate the fair value of stock options granted under the 2012 Stock Plan, the 2018 Incentive Award Plan, and under the former Guardant Health AMEA, Inc.'s 2020 Equity Incentive Plan for the Joint Venture (see Note 12, Stock-Based Compensation ), and stock purchase rights granted under our 2018 Employee Stock Purchase Plan on the grant date using the Black-Scholes option-pricing model.

The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine.

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The fair value of our common stock is determined by the closing price, on the date of grant, of its common stock, which is traded on the Nasdaq Global Select Market.

The board of directors of the Joint Venture has determined the fair value of common stock of the Joint Venture.

The board of directors of the Joint Venture determined the fair value of common stock of the Joint Venture.

The grant date fair value of the Joint Venture’s common stock was determined using valuation methodologies which utilizes certain assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability.

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Our expected term represents the period that our stock options are expected to be outstanding.

After the adoption of Accounting Standards Update 2018-07, Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting on January 1, 2019, the expected term of stock options issued to employees, directors and nonemployee consultants is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term.

The expected term of stock options issued to employees, directors and nonemployee consultants is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term.

Expected Volatility

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The Joint Venture derived the expected volatility from the average historical volatility over a period approximately equal to the expected term of comparable publicly traded companies within its peer group that were deemed to be representative of future stock price trends as the Joint Venture does not have any trading history for its common stock.

The Joint Venture will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate

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Recent accounting pronouncements

See Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis